OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has affirmed the financial strength rating of A+ (Superior) and the issuer credit ratings of “aa-” of Banner Life Insurance Company (Banner Life) (Frederick, MD) and William Penn Life Insurance Company of New York (William Penn) (Garden City, NY). Banner Life and William Penn are collectively referred to as the Legal & General America Group (LGA) and represent the U.S. operations of the ultimate parent, Legal & General Group Plc (L&G), a worldwide insurance organization headquartered in the United Kingdom. The outlook for all ratings is stable.
The rating actions reflect LGA’s strong competitive position in the U.S. term life marketplace, where it currently ranks fourth as measured by term life annualized new business premiums. The rating actions also reflect LGA’s solid operating performance, as measured on a U.S. GAAP and International Financial Reporting Standard (IFRS) basis, which has been enhanced by LGA’s efficient expense structure, its variable cost distribution network strategy and disciplined approach to mortality underwriting.
The rating affirmations also recognize LGA’s solid stand-alone risk-adjusted capitalization that has been enhanced by a high quality long-term bond portfolio, which has avoided material investment losses in recent years and is currently in a net unrealized gain position. A.M. Best recognizes LGA’s strategic importance to L&G, which has provided explicit support when needed to sustain LGA’s new business growth. A.M. Best notes that L&G derives significant diversification benefits from LGA’s mortality business, which acts as a natural hedge to L&G’s annuity business.
While these rating actions acknowledge LGA’s strong term life market position and its strategic importance to L&G, LGA’s business profile remains narrow and heavily skewed to the highly competitive and commoditized term life market. To somewhat lessen this business concentration and to further diversify its earning sources, LGA has entered the universal life insurance market. However, it has been challenged to meaningfully grow this segment. Furthermore, LGA’s concentration in mortality risk exposes it to volatility from adverse mortality experience. A.M. Best notes that LGA’s actual mortality experience over time has been generally better than or in line with pricing assumptions, and its disciplined underwriting processes serve to partially mitigate the risk of adverse experience.
A.M. Best expects LGA to continue to experience volatility in its statutory accounting results due to high levels of statutory expense strain anticipated from new business production and the effects of periodic reserve financing transactions. A.M. Best notes that prior to 2010, LGA relied on capital market securitizations to fund Regulation XXX reserves. However, unfavorable market conditions made it more difficult to obtain capital-efficient financing for its Regulation XXX reserving needs. Starting in 2010, LGA’s new term life production has been fully funded utilizing the balance sheet of L&G. A.M. Best expects L&G to continue to fund LGA’s expected new business production at least through the near term. However, should L&G’s strategy to self-fund Regulation XXX reserve requirements change, A.M. Best believes LGA may be challenged to find suitable, cost-efficient financing and re-financing alternatives for funding its Regulation XXX reserves. Over the past two years, LGA implemented a strategic asset allocation program whereby the group reduced its allocation to publicly issued investment grade bonds and increased its allocations to high yield and non-144A private placement bonds and direct commercial mortgage loans. The organization’s private placement securities and direct commercial mortgage loans are managed by outside asset managers. While these asset classes are expected to increase the overall yield of the invested asset portfolio and improve asset-liability duration matching, these assets classes are less liquid and expose the group to potential asset impairments should the global economic recovery stall or deteriorate. A.M. Best notes that this asset re-allocation did not materially impact risk-adjusted capitalization.
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